India's emerging competitive advantage in services

Executive Overview We examine the business opportunities created by the economic and political changes underway in India. Despite short-term political volatility, we believe India's deep-rooted democratic institutions give it systemic resilience and stable economic growth, at rates that will reach 8 to 10 percent within a decade. The early evidence following economic liberalization suggests that India's emerging international competitive advantage--and the corresponding opportunities for multinational corporations--lies not in natural resource industries or low-skill, labor-intensive manufacturing (as in much of Asia), but in skill-intensive tradable services, as exemplified by software. We analyze India's virtual diamond in software and argue that this success will generalize to other knowledge-based services. As a result, India is likely to emerge in the short to medium term as the back office of global corporations and in the medium to long term as a leading provider of knowledge-based tradable services. We also explore the contribution of overseas Indians to India's skill-intensive service exports, contrasting it with the contributions of overseas Chinese to China's manufactured goods exports. We recommend that foreign firms enter India sooner rather than later to seize the emerging opportunities, and that in doing so they pay attention to the considerable differences in business environments among Indian states, rather than focus simply on the policies of the central government.